Publication type
Journal Article
Authors
Publication date
July 15, 2011
Summary:
According to the standard principal-agent model, the optimal composition of pay should balance the provision of incentives with the individual demand for insurance. Do income taxes alter this balance? We show that the relative share of Performance-related pay (PRP), on total pay is reduced by higher average and marginal income taxes. Empirical evidence based on the British Household Panel Survey is consistent with the theoretical predictions of the tax–augmented principal-agent model. Our estimates suggest that a 10% reduction in the marginal income tax rate, holding the average tax rate constant, increases the share of PRP in total pay by 2.25–3.02%, depending on the empirical specification. Similarly, a 10% reduction in the average income tax rate, holding the marginal tax rate constant, increases the share of PRP in total pay by 5.10–5.27%.
Published in
Scottish Journal of Political Economy
Volume and page numbers
Volume: 58 , p.297 -322
ISSN
369292
Subjects
Notes
Albert Sloman Library Periodicals *restricted to Univ. Essex registered users*
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